Explicit solution simulation method for the 3/2 model
Computational Finance
2021-01-12 v2
Abstract
An explicit weak solution for the 3/2 stochastic volatility model is obtained and used to develop a simulation algorithm for option pricing purposes. The 3/2 model is a non-affine stochastic volatility model whose variance process is the inverse of a CIR process. This property is exploited here to obtain an explicit weak solution, similarly to Kouritzin (2018). A simulation algorithm based on this solution is proposed and tested via numerical examples. The performance of the resulting pricing algorithm is comparable to that of other popular simulation algorithms.
Cite
@article{arxiv.2009.09058,
title = {Explicit solution simulation method for the 3/2 model},
author = {Iro René Kouarfate and Michael A. Kouritzin and Anne MacKay},
journal= {arXiv preprint arXiv:2009.09058},
year = {2021}
}
Comments
21 pages, 2 figures